With oil on the rise, what next for equity markets?
That’s the question KBW try to answer in a note out on Monday. The analysts look for correlations over the last 50 years between big (ten and 20 per cent quarter on quarter) WTI rises and changes in the S&P500 and the Keefe Bank Index.
The headline result is, um, choppy: the S&P500 was equally split between higher and lower quarter-over-quarter closes when the WTI rises 20 per cent (click to expand):
KBW muse whether equities markets anticipate recessions when oil spikes. No, seems to be the response. However, the average return during spikes does, on average, represent an underperformance compared to average quarter-on-quarter moves in the S&P and BLX:
In the sixteen instances over our time frame that WTI rose more than twenty percent on a quarter over quarter basis, the SPX was evenly split between higher and lower quarter over quarter closes. The average return in those sixteen instances was 0.50% or an underperformance of 133 basis points. The KBI was lower in nine instances and higher in seven. The average return in those sixteen time periods was -1.04% or an underperformance of 308 basis points.
Intriguing, then, but not a great deal to go on for those worrying about rising oil prices.
And as FT Alphaville has politely tried to point out, be wary of being distracted by $100 a barrel Brent.
And be doubly wary of those blithely connecting $100 Brent with events in Egypt.
As this post from James Hamilton suggests, this does not (yet) look like the makings of a geopolitical oil price “shock”. Firstly, as you probably know, Egypt is a relatively small oil producer (0.8 per cent of the world’s total) and Suez transports only a small fraction of global oli (1.1 per cent).
Secondly, when the crisis hit in 1956 Suez transported 8.8 per cent of world oil and other oil giants were hit, too:
In that episode, sunken ships blocked traffic through the canal for a considerable period. Pumping stations for the Iraq Petroleum Company’s pipeline through Syria were also sabotaged. At its peak, the episode removed about 10% of global oil production, a bigger percentage disruption than any subsequent oil shock. It took half a year for production from the Middle East to get back to normal, though there was enough excess capacity elsewhere in the world to bring global production back up to the levels at which it had been before the crisis within 3 months.
And therein lies the rub — the risk of contagion beyond Egypt:
Iraq will be a huge factor in determining medium-term growth in world oil production, and Iran is twice as important as Iraq in terms of current production. And should we see the temporary cessation of Saudi production, it would be an event without historical parallel.
Gulp.
Related links:
Egypt protesters maintain pressure - FT
Full Brent coverage – FT Alphaville